Old Mutual: Planning to cut and to grow
The company hopes to gain the highest boost from East Africa and is determined to get a foothold in Ghana and Nigeria
Old Mutual lobbied hard for its shareholders to accept its managed separation, which was approved barely a month before the proposed split into two listed entities — the UK-based Quilter listing on Monday June 25 and the Africa-based Old Mutual Ltd on Tuesday June 26.
Somewhat bizarrely, Old Mutual Plc will become a subsidiary of Old Mutual Ltd, though it will remain a British company with board meetings in London. And the liabilities connected to the failed Bermuda operation remain on the books.
It is easy to forget that the life office originally started buying operations overseas as it acknowledged that it was a mature ex-growth business in SA.
Incoming CEO Peter Moyo admits that a large part of the job will be defending market shares in SA in its traditional strongholds of corporate business — where it is considerably more profitable than its competitors, thanks to its large smoothed bonus book.
Moyo first came into the executive suite through the corporate division, though he did not take an office among the fat cats on the fifth floor but turned an unused storeroom into a makeshift office.
He was a good choice for the CEO’s job, if only for his unpretentious, hands-on approach.
At least he will have power as well as responsibility. His remuneration will be determined exclusively by the success of the "new" Old Mutual, without the distractions of the US life businesses or UK wealth managers.
His basic package of R8.2m looks fair, especially next to the R6.3m to be paid to nonexecutive chair Trevor Manuel, who did not bother to turn up for the prelisting analysts briefing in May.
It is also an anomaly that Ingrid Johnson, the outgoing finance director, will be paid almost £1m simply to babysit incoming finance director Casper Troskie.
Moyo believes Old Mutual has developed the right mix of short-term and long-term incentives. Targets include cost efficiency, with R1bn of savings by the end of 2019 being aimed for, and improving net inflows. For example, meeting the cost target makes up 20% of the short-term incentives, net client cash flow another 20%, new business 10%, and stemming outflows a further 10%.
The long-term incentives, a broader share ownership plan and a long-term incentive plan for senior management will start paying out in 2020 and focus on total shareholder return and the return on NAV, but 25% of it will still be driven by the success of meeting the cost target.
So Moyo needs to grow the asset base of the business while at the same time making it leaner and more efficient. With its large legacy head office in Pinelands, designed in the 1950s, there must be scope for cuts.
The historically white business is now called Personal Finance. Its market share has fallen over the past 20 years but is still a dominant high-margin business. Under Karabo Morule the business unit is focusing more extensively on the black middle class — which needs a wider suite of products than the mass market — introducing clients to their first Greenlight disability product, for example, or helping them convert retirement savings into an annuity.
But there is some structural decline in this market, and profit fell 8% to R3.15bn.
Old Mutual avoided going ex-growth by its move into the mass market, which is now the largest contributor to earnings, having increased profit 3% to R3.16bn. Sanlam and Metropolitan are nibbling at the edges, but Old Mutual has a built-in advantage through its Old Mutual Finance branch network.
There are 7m people in the mass market — those earning between R5,000 and R20,000/month — and for now it has 1.6m savings clients, 1.7m funeral and life clients and just 200,000 on the lending and transactional side.
Old Mutual has had most competition at the top end, where asset managers and private banks, notably Investec, have eroded share.
Old Mutual’s most successful business at that end is Old Mutual International, which offers a platform to buy foreign collective investments, but this has had stiff competition from Sanlam over the past five years.
Mutual is now fighting back, with a heavy marketing budget, to position itself as a provider of "great advice".
This has been met with some scepticism, given that Old Mutual agents are not independent. But the company has such a wide range of insurance and investment products that most clients should find something that does the job competently from Big Green. However, it will probably never be the right fit for high net worth individuals.
Moyo, who is from Zimbabwe, believes the rest of Africa provides the runway for growth.
A recovery in Zimbabwe alone will have a substantial effect on Old Mutual’s earnings, as it is by far the largest life insurer there and controls Cabs, a sizeable bank.
Moyo does not expect to have to look for growth outside the continent during his tenure as CEO. The group has disposed of its 26% holding in Kotak Life in India, is disposing of the Latin American operations and, if the price is right, will also sell its half of the joint venture in China. The rest of Africa has had significantly higher growth than SA over time, though it fell to 1.4% in 2016 owing to low commodity prices and droughts. But it is moving back to trend levels of 3.5% in 2018.
The company hopes to see the highest boost from East Africa, which has had annualised growth of 5.5% over three years. There has been an increase in insurance sales through mobile devices, which have spread from 45% to 80% of the African population since 2010.
Even a comparatively developed economy such as Kenya has an insurance penetration of only 2.8% of GDP (compared with 17% in SA). But it has not been easy to build a sustainable business in the region. The company made a R61m loss; its acquisition of the UAP insurance business was supposed to add scale but has instead brought interminable restructuring.
Old Mutual has at least always had some brand presence in East Africa. It is a complete unknown in West Africa. However, it is determined to get a foothold in Ghana and Nigeria — Ghana has insurance penetration of just 1.1%, and Nigeria at 0.3% could have astonishing potential.
But for now it is bleeding money in the region, recording a R182m loss in 2017.
Old Mutual’s strategy is very different from Sanlam’s. The Bellville business has entered into partnerships to move into new markets, by far the largest being Morocco-based Saham Finances. In contrast the Big Green has aimed to build wholly owned businesses with the single Old Mutual brand, in addition to a few distribution partnerships such as its bancassurance deal with Ecobank in West Africa.
In short-term insurance Old Mutual has scope to gain market share, both in SA and the rest of the continent.
It is concerning that after six months Old Mutual Insure does not have a permanent CEO. This is not the only case in which Old Mutual’s recruitment process has taken absurdly long.
Though the business is likely to remain a poor relation to Santam for many years, its operating profit doubled to R524m, with the direct insurer iWyze also making a contribution.